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By Jonty Sacks*
The asymmetric return profile of cryptocurrency investing has lured hundreds of thousands of investors into this fast-growing high-risk asset class. Take one investor whose $8,000 investment in Shiba Inu skyrocketed during 2021 to exceed $5bn. The jury is out as to what percentage of the $5bn is liquid if the investor was to try and realise his/her gain.
With every fairy tale story, there are thousands of cases of investors who gambled with their savings simply because they invested with astronomical returns in mind or made investment decisions without understanding the market.
Shiba Inu and Dogecoin are referred to in the market as meme coins. Meme coins are cryptocurrencies that often start as a way of poking fun at the cryptocurrency market. Dogecoin as an example was created to mock speculative cryptocurrency investors but surged by 800% following a tweet from Elon Musk.
Many of these meme coins rise to popularity not based on their utility or investment case but on public sentiment, which in many cases is fuelled by a remark made by a public figure or media hype. What history has shown is that meme coins spike in value and quickly drop at the expense of investors who invested based on the hype around the cryptocurrency. These types of investments are often embraced by those who are trying to “get rich quick”.
When it comes to cryptocurrencies, utility and adoption are key. Do the cryptocurrencies, or the underlying technology they represent, have a real use case in society and/or are the cryptocurrencies widely adopted or show signs of broad adoption. If not, their price movements are more than likely driven by speculative investors – a sharp rise followed by a sudden fall.
So where will investors find long term growth in this market?
As a starting point, investors should have a deep understanding as to what problem a specific cryptocurrency (or protocol) is trying to solve and then take a view as to whether the solution will be adopted by the market.
Take AAVE as an example, AAVE is a protocol that allows users to borrow capital using their cryptocurrency as collateral. Currently, AAVE has over $24bn in liquidity, can issue loans within minutes and has a staff count of zero. In essence, AAVE has replaced a function of major banks at a fraction of the time.
Ethereum is another great example. Ethereum is a blockchain network that allows protocols to process transactions (AAVE is one of many protocols which transact over the Ethereum chain). To date, the market cap of Ether has grown to $380bn and the network processes more than 1 million transactions per day.
The solution for investors is to have a diversified basket of cryptocurrencies which is made up of cryptocurrencies that are solving real-world problems and have seen global adoption. This strategy reduces an investor’s risk profile and takes the gambling element of investing out of the equations.
- Jonty Sacks – Partner at Jaltech
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